Sunday, January 15, 2012

The Pain of Bain Falls Mainly on the Insane

Romney's time at Bain is the best, most defensible part of his record

Newt Gingrich, fresh off of making tens of millions as a DC insider access provider to the rich and famous, has a lot of chutzpah criticizing Romney, and by implication, capitalism. Operatic bloviator Gingrich sternly intones how Romney has some explaining to do, while laughably characterizing his gold-plated lobbying as "history consulting." Sure, DC is constantly clamoring for the services of historians.

Romney made billions and saved companies while Newt danced and sang on the Good Ship Freddie Mac, and we are still paying for the malfeasance that went on there while The Great Historian was collecting his government-funded fees. And only raw politics unencumbered by principle can explain why the inarticulate governor of America's free enterprise job engine would would join in on the gang attack.

Private equity is a route firms in trouble often take. Usually, the only alternative left is going out of business, resulting in everyone losing their job.

First, a brief explanation of private equity from economy reporter Robert Samuelson. I recommend the entire article. It is a dispassionate, fact-based examination with blessedly lucid explanations:

Private equity refers to groups of investors buying the stock of an existing company, thereby “taking it private.” Because most purchases use borrowed money (“leverage”), these transactions are known as “leveraged buyouts.” Once the investor group has control, it tries to improve profitability by lowering costs and increasing sales. The hope is to resell the business at a huge gain; this usually takes three to 10 years. In 2010, private-equity firms invested $148 billion in 1,234 U.S. companies, says the Private Equity Growth Capital Council. (WaPo - Samuelson)

For those leftists of all parties still bawling about Bain, investment banker and Obama man Steve Rattner comes to Romney's defense.

Bain Capital is not now, nor has it ever been, some kind of Gordon Gekko-like, fire-breathing corporate raider that slashed and burned companies, immolating jobs wherever they appear in its path.

Wall Street has its share of the “vulture capitalists” that Texas Gov. Rick Perry enjoyed mocking in South Carolina earlier this week. But Romney was almost the furthest thing from Larry the Liquidator. (Rattner - Politico)

Don't Blame Bain -- Blame Government Tax Policy

First, it’s fair game to question the amounts of debt that are sometimes used in leveraged buyouts. While higher debt usually means higher returns — because debt is cheaper than equity, thanks in part to its tax deductibility — it also means higher risk of bankruptcy.

Bain had less than its share of bankruptcies, but it had a few — it appears four — that are particularly troubling. In all those cases, when the portfolio companies initially showed signs of promise, Bain took advantage of their progress to borrow more money, which it took out as a dividend. Later, the fortunes of each company turned down, ultimately into insolvency.

When Bain “releveraged” those companies and took the cash out, the investment managers of course had no idea that the companies would later falter. But with the benefit of hindsight, taking a more conservative approach and refraining from squeezing these dividends out of the companies would certainly have been more prudent. (Rattner - Politico)

The liberal Rattner concludes...

It’s certainly fair game for any candidate’s opponents to dig into his record. But in Romney’s case, focusing on questions about his principles — and his current, staunchly conservative ones — could be more productive than trying to rewrite the firm’s history.
(Rattner - Politico)

Indeed. Go after Romney on his liberal record and statist reflexes, but his Bain actions appear to be on the up and up. Upon comparison, Obama is clearly the superior job-destroyer and money waster.

Finance is only one part of capitalism. To put all of this in a larger context, I recommend Adam Davidson's excellent article in Atlantic, Making it in America, where he gives us insight into manufacturing in America.

21 comments:

Clearly, Newt Gingrich has lost his political mind with his attacks on Mitt Romney. He misjudged the response, which has been anything but favorable to his campaign.

Concerning Bain Capital, you rightly point out that many of the companies they acquired came seeking them out. Those companies were in a heap of financial trouble and a venture capitalist was their only way out. Sometimes that works and sometimes it doesn't, but that wasn't necessarily the fault of Bain or Mitt Romney.

Silver,you seem to have abandoned the creative destruction meme. Good. That's because Schumpeter was speaking of entrepreneurs and risk. Romney took no risk.In order to profit the entrepreneur must grow a business and in the process jobs are created. Romney met no such requirement.

Now the Bain Company did consult with struggling companies but Romney worked for Bain Kapital, a different entity. There he piled up a record of government subsidies, bankruptcies and asset stripping that created nothing.

A true corporatist who exposed the flaws of capitalism but you defend this piece of crap. Can't quite bring yourself to admit that Romney is an example of the future as wealth is transferred upward and the middle class circles the drain.

I partially agree with you Ducky, which is why I mention at the end that this type of finance is but one part of free-market capitalism. And it is a knock on Romney, as one of the articles points out, that he didn't really create anything.

The "Creative Destruction" argument is still apropos, but it doesn't refer to Romney taking a sledgehammer to companies, but rather companies with outdated business models or manufacturing techniques or simply outmoded ideas going out of business. People and Plant get scooped up for more productive activity. That is the creative destruction.

Your hatred blinds you to the truth, which is that Bain saved 2-3 times as many companies as went under while Romney was there.

You might also read this one by Ross Douthat in today's New York Times. He's not as sure that Bain Capital was so wonderful. It's not so simple.

Here's the meat of his column, posted here, because I think you have to be a subscriber now to get NYTimes articles:

But neither was Romney the Henry Ford-esque job creator he’s tried to play on the campaign trail. He served his investors, not his employees, and his goal was always to make an uncompetitive company competitive, even if that required cutting paychecks and shuttering plants along the way. What’s more, Bain usually found a way to reap profits even when the overhaul failed and the company went belly-up.

In the broadest sense, though, the competitiveness revolution was good for the United States. In the 1970s, there were sound economic reasons to expect that other developed nations would gradually catch up to American living standards and per capita G.D.P. Instead, our rivals got rich, but we stayed richer. As Adam Davidson noted in last weekend’s Times Magazine, “even Europe’s best-performing large country, Germany, is about 20 percent poorer than the U.S. on a per-person basis.”

But keeping America’s edge came at a cost. Our economy became more efficient, but also more ruthless and Darwinian. Our G.D.P. kept rising, but the new wealth was less evenly distributed. The revolution delivered growth, but at the expense of stability and certainty. And for many Americans, even the “modest net impact” of private equity buyouts cost them a solid, good-paying job.

On the left, and now apparently in Newt Gingrich’s campaign shop, there’s a persistent suggestion that it could have been entirely otherwise — that the midcentury model could have somehow been sustained, that the private equity “vultures” could have been held at bay, and that what worked for the United States when Europe was in ruins and half the world was Marxist-Leninist could have worked in the age of globalization as well.

This is a fantasy, unfortunately — one that belongs to the world of Hollywood endings, where Gordon Gekko is defeated, Blue Star Airlines stays in business and Bud Fox’s dad gets to retire with a solid pension. Indeed, it’s such a fantasy that even Oliver Stone didn’t quite believe in it: In “Wall Street,” Blue Star was saved from Gekko’s clutches — and presumably, from the real-life fate of an Eastern Airlines or a Pan Am — not by a government subsidy or a benevolent Daddy Warbucks, but by a rival buyout specialist.

Still, just because the private equity revolution was necessary doesn’t mean that it was an unmitigated good. And for Mitt Romney to frame criticisms of Bain as just “the bitter politics of envy,” as he did last week, displays a tone-deafness that could cost him the presidency. No one — and certainly no politician — who has profited so immensely from an age of insecurity should ever appear to be lecturing the people who’ve lost out.

Instead, Romney needs to prove to anxious voters that he and his party have more to offer them than just Bain capitalism alone. To win the White House, he’ll need to promise not only competition that leads to growth, but growth that leads to broadly shared prosperity. To defend his revolution, he’ll need to show that he’s reckoned with its costs.

Gingrich is taking a disappointingly populist (and therefore not conservative) shortcut to attacking Romney's Gordon Gecko routine. This does not necessarily make Gingrich anti-capitalism, in general or in specific.

If Romney were the magical underwear financial whiz he claims to be, he'd ask to see the ledger books of the people his raiding put out of their jobs and homes and tell THEM where they went wrong.

there's the story of a washing machine company, too; Gingrich has it in what seems to be a 'Michael Moores-esque" hit job on Romney...the couple interviewed whine about having lost their jobs, etc etc etc..........a little investigation shows that Romney wasn't with the company when they lost their jobs, etc etc.We're going to get a LOT of this during the campaign if he's nominated.

Man, it's just nuts that Obama had so little vetting ..... and look what we got. Wait till the msm starts vetting Romney! The Double Standard's hilarious and I think America's going to wake up as they watch. I hope so.

This is untrue. Mr. Obama was competing against one of the most powerful political machines in the US: The Clintons. If anybody could find some dirt on him, they would have.

To keep repeating this absurdity is to acknowledge that you are not satisfied with the fact that nothing was found in Mr. Obama's background that disqualified him to be president.

Mr. Obama is a natural born citizen, was over the age of 35, and was 14 years a resident of the US--the only qualifications needed to be a US president as set out in the Constitution.

Mr. Obama is also someone who held political positions that you and others strongly disagree with. That does not disqualify him. It just makes you angry that a majority of Americans chose him, despite your dislikes.

In years past, we have a private equity industry. It was people who had personal experience in the industry they were investing, had a proven credit record with the money from that industry to back it up, and went to their local bank and rescued a business.

I know! I worked for one. In the 1980's I worked in California for a company that had been dying before three investors took it over and turned it around. One of the investors was a Mexican immigrant who'd brought his family up from LA to the Super Burbs.

In today's world, with today's many unregulated private equity schemes, people with no knowledge of a given industry, no connection to the people who do the work, no record of ever doing anything other than playing around with money like drunk rich spoiled gamblers at the track, can kill a good thing like a rotten kid stepping on a bug.

Silver, this post... I don't know. I think you should bring more ethics into this argument.

Romney's been chosen by The Anointed -- i.e. The Elite, The MIC, The Oligarchs etc. -- because The Anointed think he's the least likely candidate to beat their boy Obama.

The would-be candidates of The Stupid Party have fallen right into the hands of the Master Manipulators -- maybe deliberately? -- this is all "Theater" -- by wasting precious energy staging a Junior High Cafeteria-style good fight among themselves, instead of focusing on the depressing, degenerative effects of Obama's continuation and accelerated expansion of GWB's failed policies.

Let me tell you a secret:

THE TWO PARTIES are in truth ONE PARTY. These connivers have fixed it so that no matter what WE do, THEY can't lose.

The joke, my fractious, contentious, frazzled, contemptuous friends is on ALO of us.

I'm afraid "the young-uns" still cherish the illusion that meaningful opposition to the Oligarch's Agenda actually exists.

Rn Paul -- whom "everyone" has been persuaded by the Oligarch-Owned-and Operated Media, which is, of course, nothing but a Propaganda Mill for the Establishment, to believe is some kind of "kook" -- is the ONLY one out there who's telling us anything that bears even-a-faint-resemblance to The Truth.

Just call someone an "anti-Semite" a "racist" a "child-molester" or a "conspiracy theorist," and he's as good as dead.[Call him a "Communist" however, and these days he's sure to get elected and become a popular "folk hero."]

People who use such name-calling tactics to "win" points -- or whatever -- are beneath contempt.

The adage still holds true: "Believe nothing of what you hear, less-than quarter of what you read, and only half of what you see."

The Founding Fathers and those who fought in the Continental Army were our original Western Heroes, guided by the thinkers of the Enlightenment and following in the footsteps of great warriors like Jan Sobieski and Charles Martel.